2019 Litigation Forecast - Construction – galvanising a sector

The construction and building litigation space has been in an active phase, and the past year was notable for the decline and liquidation of some high-profile construction firms. These events have sparked much needed dialogue on a national scale between all key stakeholders. There is hope of isolating the systemic issues affecting the industry throughout the lifecycle of projects, and forging a new and more productive path for all parties involved. A boom in infrastructure and development projects over the coming years necessarily requires a galvanising of the industry to ensure project and stakeholder success.

An issue seemingly systemic to construction industries the world over is the handling (or lack thereof) of the risk of unforeseen ground conditions in contracts between an owner/principal and the contractor. Another key issue is that the success or failure of a construction project relies heavily on the ability of stakeholders on a project (principal, contractor and consultants/subcontractors) to efficiently resolve live conflicts.

The rise of pre-dispute processes and dispute boards is a positive development for the industry, although we feel it is yet to be fully embraced in New Zealand. Where disputes have reached the point of formal litigation, there is tension between lawyers running the litigation process and the experts engaged to assist them. This can lead to unfortunate outcomes for the expert, lawyer, and ultimately, the client.

Government to take the lead on appropriate risk allocation in future contracts

Given the Government is a significant stakeholder, acting in the capacity of an owner/principal on many high dollar construction and infrastructure projects in New Zealand, we see its leadership on risk allocation in contracts being critical to move the industry in the right direction on this issue. The Government has stated a fairer allocation of risk needs to be struck between principals and contractors and we predict the Government will lead by example on future projects in the coming year.

Innovative dispute resolution procedures to become more prominent

With respect to recently completed or yet to be completed projects, we expect to see ongoing legacy disputes continue as a consequence of the historic imbalance of risk allocation in contracts. As the construction industry grapples with a currently litigious environment, we see innovative pre-dispute or pre-escalation procedures, such as dispute resolution boards, becoming more prominent to assist in the avoidance of costly litigation which ultimately undermines the success of a project and creates strains on relationships which may continue long after the project has finished.

Tensions between lawyers and experts will continue to persist but heightened awareness of the potential for tensions at the outset of an expert’s engagement should assist in a more collaborative and productive process and outcome.

“We see innovative pre-dispute or pre-escalation procedures, such as dispute resolution boards, becoming more prominent to assist in the avoidance of costly litigation.”

Ground condition risk will keep being contentious

Given the difficult climate the construction industry has been navigating, we expect to see the discussion both in New Zealand and globally about the contractor’s perspective on unfair risk allocation in contracts continue into 2019. In many cases, contractors feel pressured to assume risk around ground conditions without enough information and/or time to consider the implications, or appropriate contractual protections/carve-outs.

Due to the historic ‘lowest bid mentality’ this risk is typically excluded in pricing – either directly, or through contingencies or ‘tagging’ – the contractor possibly hopes to claim a variation post tender award. However, disputes and cost blowouts follow as the contractor inevitably faces difficulty if the variation relates to the risk assumed under the contract.

Both parties should consider the benefits of facing the issue at the outset – and principals either maintaining or sharing ground condition risk, and/or exploring risk mitigation strategies or appropriate contractual protections. It is also prudent to develop a process where the contractor has sufficient opportunity to investigate to make an informed decision, and price appropriately on ground condition risk. Parties need to be aware that contract provisions that unfairly distribute risks amongst themselves inevitably leads to greater issues for all and, should those risks crystallise, relationships break down and the project (from all perspectives) suffers.

“Parties should consider the benefits of facing the issue at the outset – and principals either maintaining or sharing ground condition risk, and/or exploring risk mitigation strategies or appropriate contractual protections.”

The use of Dispute Boards will increase

We expect to see the use of Dispute Boards and their functions develop in 2019.

Dispute Boards are a creature of contract, and the contract determines their function. In the United States, Dispute Boards are viewed more as performing a project management function – addressing progress and issues arising during a project, not as a decision making body. In Canada and Australia dispute boards act as review and/or decision making bodies.

While Dispute Boards can hold a variety of functions from interactive, interrogative to ‘adjudication’ bodies to determine (even at an early stage in some cases) disputes arising under the contract, there has been mixed success around the world with these different functions.Greater success may lie in Dispute ‘Review’ Boards – a proactive and neutral board without an adjudication focus. These boards are, if designed correctly, able to deal promptly and realistically with problems at the time they occur – before the problems develop to a truly adversarial stage and while the facts are ‘fresh’ and prior to the people involved moving on.

Good lawyer briefings will improve the expert / lawyer relationship

The role of the expert and the tensions between lawyers and experts that arise have been, and will continue to be, a hot topic (despite jurisdictional differences on the role of the expert, these issues appear to be common globally). In the United States there is no code preventing advocacy of the expert and the lawyer plays a crucial role in writing the expert’s brief. In New Zealand, the expert’s overriding duty is to assist the court impartially. Advocacy is not permitted and if an expert is seen as an advocate, the evidence provided will be marginalised as a result.

Experts are often frustrated by the need for guidance from lawyers on the law applying to their evidence and of the embarrassment of being ‘thrown under the bus’ by less experienced lawyers requiring them to perform a role they are not entitled to perform (i.e. determining the ultimate issue in a proceeding) or giving them incomplete or misleading information.

Lawyers may experience frustration when experts want to explore the full picture before the lawyer has crafted the scope of the question to be answered. An expert may not be able to answer any lawyer’s question if they haven’t had the opportunity to gather evidence at an early stage and before it is destroyed. To solve this issue, lawyers should responsibly brief the expert on their role and the code/law they must follow to produce admissible evidence. They must also provide all relevant evidence for the expert to review – not just the evidence most favourable to their client.

Read the full Litigation Forecast

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